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July 27, 2011

Greece Sees Second Rescue as Euro Bond

Greek PM says measure is a move beyond monetary union; Germany denies

Greece's Prime Minister George Papandreou said that the bond repurchase measure in the country's second bailout amounted to a joint euro zone bond in what he called a move beyond a monetary union for the group of 17 nations sharing a single currency. Germany, however, said Berlin was opposed to such an approach as a broad measure.

Reuters reported that Papandreou, speaking on Wednesday to party lawmakers, made the characterization about the low-interest loans that are to be extended to his country. While Papandreou has supported the idea of jointly issued euro zone bonds, opposition to the notion has been fierce among other euro zone nations such as Germany. However, the Greek leader said that in agreeing to extend cheap loans to Athens, the euro zone had taken one step closer to making such bonds a reality.

He was quoted in the report saying, "The decision of our European partners to lend us at 3.5%, an interest rate just above the one at which Germany itself is borrowing, is in essence tantamount to introducing a European bond, regardless of the fact that this system has not been completed yet."

Papandreou praised the move, adding that, while Europe was not rushing to make decisions on the debt crisis, it was also moving toward a more united front. He said in the report, "Europe is becoming more political, stronger. It is moving beyond the stage of being just a simple monetary union."

Last week euro zone members agreed to buy back bonds on the secondary market through the European Financial Stability Facility (EFSF), the group's rescue mechanism, as part of Greece's second rescue package. Papandreou called that decision an initial move toward a means of approaching debt management with a common approach throughout the euro zone.

However, the cost to insure Spanish and Italian government debt against default increased again on Wednesday when German Finance Minister Wolfgang Schaueble countered Papandreou's claim. Schaueble said Berlin was opposed to a blanket approach by the euro zone to peripheral nations' debt, and that the EFSF should not routinely purchase member bonds on the secondary market to assist them in debt struggles.

Gavan Nolan, an analyst at CDS data provider Markit, was quoted saying about the rise in cost to insure, "The lack of clarity on the new role of the EFSF and the execution risk involved with the EU plan are weighing on the market." Five-year credit default swaps (CDS) from Italy, Spain, and other peripheral nations rose; the cost for Italy increased by 22 basis points.